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Chancery Declines to Dismiss Derivative Claim Challenging Compensation of Goldman Sachs Directors

Stein v. Blankfein, C.A. No. 2017-0354-SG (Del. Ch. May 31, 2019).

Recently, the Delaware Supreme Court held in In re Investors Bancorp, Inc. Stockholder Litigation, 177 A.3d 1208 (Del. 2017) that stockholder approval of director self-compensation plans will shift the standard of review from entire fairness to business judgment only where the stockholders approve a plan that does not involve future director discretion in setting the compensation amounts. In Stein, the Court of Chancery applies Investors Bancorp and declines to dismiss a disloyal compensation claim, notwithstanding that the terms of the challenged compensation plans sought to absolve the directors of self-dealing claims and even though the plaintiff attacked only the compensation amount, not the process by which it was determined.

According to the complaint, non-employee director compensation at The Goldman Sachs Group, Inc. is set by the board of directors. In total, each director was eligible to receive $605,000 in annual compensation. Plaintiff alleged this amount was grossly excessive relative to peers, particularly given the company’s relative performance, and that it constituted a breach of the directors’ duty of loyalty. The defendants argued that the stockholder-approved compensation plans included language that waived the duty of loyalty and imposed only a good faith standard.

The Court expressed skepticism that a majority of stockholders could waive a corporation’s right to redress for future and unknown unfair self-dealing transactions. In any event, the Court reasoned that no waiver occurred here. Waiver under Delaware law requires a voluntarily, intentional relinquishment of a known right. Applied to the facts of this case, accomplishing a waiver would have required informing stockholders that the plans contemplated self-interested transactions subject to entire fairness, and specifying that approving the plan would waive the right to redress for such transactions, even if unfair, absent bad faith. Further, in line with Investors Bancorp, the Goldman Sachs compensation plans provided for stock awards to the directors at their discretion, implicating the entire fairness standard of review. Plaintiff’s complaint included allegations that made it reasonably conceivable that Goldman Sachs’s compensation was excessive relative to better-performing peers and was not entirely fair to the company. Thus, the Court of Chancery sustained plaintiff’s claim for breach of the duty of loyalty.